Corportae Finance

Feb 3rd, 2012

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University of Phoenix

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Bond Valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? Cash flow = $1000 x 7.4 % = $74

Week 2 HomeworkJulie SotomeyerFIN/571 Corporate FinanceApril 8, 2013Professor Jim SmithChapter 5 Problems A1. (Bond Valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%. What is the fair value of this bond? Cash flow = $1000 x 7.4 % = $74The fair value of the bond is $474.90 + $422.21 = $897.31, calculation as follows: 1. (1/a)x(1- 1/(1+a)^n) = (1/9%)x(1-1(1+9%)^10) = 6.4176. $74 x 6.4176 = $474.902. 1/(1+i)^n = 1/(1+9%)^10 = 0.42241$1000 x 0.42241 = $422.41A10. (Dividend Discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%? Current market value of the share = Expected dividend/(Required return-Growth) 5.60 /(0.1-0.06) = $140.A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends are now growing. What is the required return on James River preferred stock? Dividend/Market Price =